“Cold War Two”

Russia’s Annexation of Crimea: All About Energy?

Checkpoint Charlie

It’s a strange time to be traveling in Europe, and no stranger was a visit to Berlin, which is becoming the new epicenter for what a local paper coined today, “Cold War Two.”  Germany has accused Russia of tearing Europe apart (read more here).  Yesterday I visited Friedrichstraße, or as it’s better known, “Checkpoint Charlie.” that, along with the Berlin Wall, symbolized the divisiveness and threat of tensions between Russia and the world. Following Putin’s fabricated “crisis,” the Russian invasion, and soon-to-be annexation of Crimea, the west once again finds itself asking itself collectivity, “how could this be?” If you look beyond the media hype and blame games, the reasons are quite evident and implications chilling.

The original Cold War rose along lines of political ideology. Today, it’s more about Russia’s most valuable currency: energy. Like the US, Europe has a thirst for cheap energy, the opiate of modern economies. Putin has skillfully leveraged Russia’s vast energy reserves to make much of eastern Europe dependent on Russian energy, mostly natural gas. For example, approximately 90 percent of Bulgaria’s gas comes from Russia, 70 percent in both Hungary and Poland, 35 percent in Germany and 25 percent in Romania. As we can now see, the strategy has been very steady and highly effective.

 

South Stream Pipeline

 

The mainstream press hasn’t covered much about what may be the biggest reason for the Russian annexation of Crimea: the South Stream Pipeline Project. For approximately seven years, Putin has been negotiating a path from southern Russia south-easterly to eastern Europe extending Russia’s influence, control and income from gas. A main spur of this pipeline was blocked by the Ukraine from passing over their Exclusive Economic Zone in the Black Sea without a large scale environmental impact study and Ukrainian permits possibly allowing the competitive White Stream Pipeline Project from neighboring Georgia to beat them to the prize. Although the South Stream pipeline could be re-routed around the Ukrainian continental shelf, it would be far more expensive and take longer to complete. This is just my left-field theory, but control of Crimea and the Ukrainian Navy could now allow Putin a prize that’s far more valuable than Crimea: access to more wealth and influence. That’s how “petrodictators” gain and maintain control.

EU leaders are meeting now discussing ways to reduce their energy dependence on Putin. The most favored strategy is to accelerate importation of relatively cheap American shale gas. Today, Germany is paying approximately 300% more for gas than US consumers pay. The US gas industry is ready to leap on this opportunity for significant and profitable gas trade to Europe, but investment and infrastructure are being held up by Washington lawmakers. This trade would benefit not only producers but also the many pipeline owners, shippers and refiners. Natural gas would need to be pressurized and converted to LNG for shipping. This is a an energy intensive process.

There are those in Washington that feel that cheap American gas should be reserved for the US market while opposing views favor profitable, sustainable US foreign trade. This is also likely one of the best strategies for diminishing Russia’s influence and overt power plays that is destabilizing all of Europe. This, along with significant banking sanctions could break the choke-hold Putin has on the region. Without a steady flow of income from energy, petrodictators seldom retain power. Just ask Gaddafi, Chavez and Ahmadinejad.

So what does this all mean to Thayer Corp and our customers? Expect gas prices to rise steadily and relatively quickly. Natural gas is still a great choice for buildings, but shouldn’t be favored over you best investment; comprehensive preventive maintenance: the “lowest hanging fruit” of your conservation program.

Dan

Dan Thayer, P. E.

President, Thayer Corporation